Russia's in hot water over Europe's shale gas revolution

What’s behind Europe’s decision to back away from hydraulic fracturing? NATO claims that it’s all part of an elaborate plot to increase Europe’s dependence on Russian gas.

Worker with state-of-the art equipment of a shale gas rig of the Canadian-based Talisman Energy Inc. that is exploring for the fossil fuel in the middle of muddy fields in in central Poland. Photo: AP

Barbara Hendricks, Germany’s Minister for the Environment, said at a news conference this month that new legislation aimed at regulating shale gas production would result in the “strictest regulations we have ever set.”

That’s a bad omen for at least one person: NATO General Secretary Anders Fogh Rasmussen, who accused Russian special services of covertly funding environmentalists to discredit fracking, a method of gas extracting that involves blasting dense shale rocks with a high-pressure mixture of water, sand and chemicals to release the tiny bubbles of natural gas trapped within.

“I have met allies who can report that Russia, as part of that country’s sophisticated information and disinformation operations, has engaged actively with so-called non-governmental organizations – environmental organizations working against shale gas – to maintain European dependence on imported Russian gas,” Rasmussen told the Chatham House think tank in London in June.

In reality, all of the new anti-Russian statements that have been pronounced lately most likely carry purely economic implications and are based on the increasing competition in the European oil and gas supplies and services markets. The shale revolution, which occurred quite a long time ago, has allowed the U.S. to switch from being a net importer of natural gas to being a supplier of natural gas to other countries.

Not so long ago, there was even a U.S. announcement about the lifting of the ban on the supply of crude oil, which has been in place for some forty years already. This contributed, too, to the breakthrough in the production of alternative sources of oil in the United States.

Will the US be able to export shale gas?

There is a view that the U.S. is preparing to supply shale gas in a liquefied form outside the United States as well. However, the problem is that shale gas and oil contain large amounts of impurities, which not only increases the cost of production, but also complicates the treatment process. Due to chemical differences (shale rock can contain from 30 percent to 95.5 percent methane), instability of the composition requires individual adjustments for each extraction site as well as for transport in a pipeline and for liquefaction.

In the preparation process for simple consumption in the household, producers need to remove harmful impurities from it, because of which it sometimes does not burn at all, and “balance” the calorific value, which usually means the addition of heavy hydrocarbons (ethane, propane and butane) or occasionally, the extraction of these.

“Fat” gas (crude gas that contains a very high amount of heavy hydrocarbons – about 15 percent) is sold to chemical plants, and “lean” gas (gas with low concentration of heavy hydrocarbons – up to 1 percent) comes in cylinders for household needs and puts downward pressure on local prices.

As a result, competitive prices for domestic gas are possible at very short transport distances, and that is why shale gas is almost fully consumed at the production site (shale gas share in domestic consumption in the U.S. is quite large – about 40 percent) and conventional natural gas is shipped to other countries.

That way, things are easier and more profitable for everyone, however extensive production of SG limits the opportunities for expanding the supplies of conventional gas.

Thus, the correct question to ask today, is not so much about hypothetical natural gas supplies coming from the U.S. to the EU (they cannot even be considered, as such really large volumes to influence the market are simply impossible for the U.S. to produce or supply). However, the question of supplying shale oil mining technologies to other countries, about the entry onto new oilfield markets, is a valid one.

New round of the shale boom

This new direction is beneficial for U.S. companies, because it will open a new round of the shale oil boom and allow them to reanimate the stock market. Share prices of companies during the shale gas revolution in the U.S. soared, and even the financial crisis did not dampen this growth. This path will allow the U.S. to resolve some of its problems with economic growth and provide jobs in the EU.

However, this path presents a few problems. The first problem – viewed from the perspective of the U.S. - is the fact that Russia has provided reliable gas deliveries to Europe for decades at affordable prices.

The second problem is related to the positions of both European and American ecologists. Such positions are clearly seen in the example of France, where in 2012 they introduced a five-year legislative ban on the use of hydraulic fracturing technologies to develop shale gas reserves. [Germany, as can be seen by the actions taken in the energy sector, is also indecisive and is planning to ban hydraulic fracturing technologies in the near future – Editor’s note]

Today, under conditions of growing disputes between Russia and the West, the competition in the oil and gas market keeps increasing. This is something that is now reflected in the rhetoric of NATO officials. In this increasingly competitive environment, everything is fair, and the General Secretary of NATO Anders Fogh Rasmussen, speaking as a private person, accused the “greens” - including American ones - of selling out.

According to Rasmussen and others in the Western community, gas supplies from Russia pose a threat. As a result, he suggests the environmentalists have been bought off by Russia.

Let us consider the prospects of starting shale gas production in the EU. In Europe, shale gas production is being considered within the framework of seeking energy independence from Russian supplies. After all, the price of Russian energy continues to grow. As a result, mainly U.S. companies have conducted explorations for SG deposits in the UK, France, Sweden, Germany, Austria, Hungary, Romania and Ukraine.

At the same time, given the comments that the positions of the environmentalists are being undermined, the shale gas stocks in the EU and their quality do not allow us to speak about any future ability to refuse gas supplies from Russia. For example, Poland has significantly reduced its estimates of domestic recoverable SG reserves, which was stated in a report published in March 2012 by the Polish Geological Institute. Currently, recoverable shale gas in the country is estimated at 365-768 billion cubic meters,, which is significantly lower than the estimates provided by the American Energy Information Administration.

Moreover, drilling efficiency is not that high: In 2012, Poland issued more than one hundred exploration licenses, and already in the spring of that year, ExxonMobil drilled two wells in Poland and wound down the project, claiming it was unprofitable (the gas was “skinny”). The same results were realized in the first 50 wells drilled by other companies, and as a consequence, the hype surrounding Polish shale gas significantly cooled.

Nevertheless, the first successful step was taken in 2014 (two years after the sale of licenses) by some American companies, and Poland became the first country in Europe to begin commercial shale gas production at the Lębork Field in Pomerania. The extraction is being carried out by the company Lane Energy Poland, which is controlled by the American company ConocoPhillips.

This has increased the share price of ConocoPhillips, but has insignificantly contributed to European goals. Given that Polish imports of gas stand at 11.0 billion cubic meters per year, and total annual consumption is 16.6 cubic meters per year, the Poles are planning to replace all gas imports with domestic production within the next ten years. However, in the energy sector in Poland, its large share of coal usage, in the long term, should be at least partially replaced by a “clean” natural gas. Therefore, even if there is a growth in domestic shale gas production, Poland is likely to continue to import natural gas.

In addition, Ukraine is also failing to reach its goals: The Ukrainian State Geological Survey recently increased its estimates of shale gas reserves to 12.5 trillion cubic meters. Ukraine currently imports from Russia about 20 billion cubic meters of natural gas annually, which is twice more than what Poland imports, and has set itself a task of achieving a growth in SG production during the next 10 years from 0 to 13 billion cubic meters.

This is quite an ambitious figure, which in practice cannot be achieved so quickly, even with the help of U.S. companies and even in ideal conditions, something that is confirmed by the experience of Poland. In addition, simple arithmetic dictates that about 7 billion cubic meters of natural gas will still have to be imported.

Thus, the expansion of U.S. companies onto the EU shale oil market – as well as the words of Rasmussen, which would appear to clear the way for them in Europe - pose no real threat to the interests of Russia’s Gazprom and Russian domestic companies over the short- or even medium-term. In fact, they may only contribute to the inflating of yet another financial bubble on Western stock exchanges.

The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.

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Ivan Kapitonov, is the Deputy Head of the Department of State Regulation of the Economy and a Lecturer of Public Finance at the International Institute of Public Service and Administration of the Russian Academy of the National Economy and Public Administration under the President of the Russian Federation. He also chairs the International Trade Department of the Institute of International Economic Relations and since 2007, has been a senior fellow at the Energy Policy Sector of the Institute of Economics of the Russian Academy of Sciences. Since 2002, he is the author of more than 50 Russian and foreign articles on economics, five books and 4 textbooks and manuals.